Here’s a quick way to calculate much you should charge for your hourly consulting rates. Whether you provide consulting services or add value to your product line by individualized consulting, you should price your services based on your value. Use this process to set your consultant hourly rate. I’ve also included pricing models for consulting services to help you determine how to present your rates to prospects.
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How to Calculate Hourly Consulting Rates
Professional services companies, such as accountants, lawyers, human resources, IT services, and others often provide their services at an hourly consulting rate.
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But even product companies can add to their revenue stream by offering consulting.
For example, a retail store own can update their boutique business plan with a consultant hourly rate to offer personalized fashion advice. A software reseller can provide customized solutions to recommend the right products for a particular purpose. A reseller of sauna equipment can add consulting rates to create custom layouts based on room configuration. A furniture reseller can offer interior design services.
By listing a consultant hourly rate as a product line item, you can generate a new source of revenue.
Setting Your Consultant Hourly Rate
Here’s a fast way to calculate a ballpark hourly consulting rates:
- 2000 average available work hours per year
- $100,000 target annual salary
- $25,000 expenses (don’t forget medical, dental, etc), presuming you work from home and have no office rent expenses
- $125,000/2000 = $62.50/hour if you work from home and have no rent
- BUT – you probably won’t be billing all 2000 hours
- Presuming you are able to bill at least half time, the numbers go to: $125,000/1000 = $125/hour
You can tweak the calculations based on your specific situation. For example, if you rent an office or workspace, include that in your expenses. Also, add in the cost of software, website hosting, and other services you will need to run your business.
IMPORTANT: As this 1-minute video below explains, if the first set of questions your prospect asks is about price and not about what they’re looking to achieve, that’s a red flag.
Take a hard look at your gross margin to see how you can minimize your expenses to maximize your profits.
3 Consulting Pricing Models
Charging your client an hourly consulting rate is just one pricing model for your consulting business. There are scenarios where you might consider alternatives, like pricing by project or asking for a monthly retainer.
Here’s how to think through which pricing model best fits your offer, which may differ by consulting client.
1. Consulting Hourly Rate
Imagine you’re guiding a ship through rough waters. Charging hourly is like keeping a close watch on every nautical mile you cover. This model suits projects where the scope might change frequently or when clients need sporadic advice.
Consulting Example: Let’s say you’re consulting with a startup founder. They might need a few hours this week to draft a business plan, and then just a couple more hours the next week for feedback.
Pricing Model Example: In this scenario, you can simply use the hourly consulting rate that you calculated above. Most consultants require a monthly minimum so that they avoid the overhead involved in sending out invoices for 1 or 2 hours of sporadic work.
2. Consulting Rate by Project
Picture yourself building a bridge. You’re working towards a well-defined goal, and you estimate the time and resources it will take. Charging per project is like quoting a fixed price for building that bridge. This is ideal when both you and your client have a clear understanding of the project scope.
Consulting Example: You’re coaching a company through a complete website overhaul. You’d give a flat rate for taking them from the initial audit to a fully revamped, SEO-optimized website.
Pricing Model Example: To calculate the cost for your project, once you have defined the scope, you will need to rely on your expertise in terms of how much time you think it will take to complete. Tack on 10-20% as a margin of error and use that in your proposed cost.
If it makes sense for your consulting project, you can add an itemized list, but often a client may use such a list against you in trying to negotiate a lower rate. Stand firm unless you absolutely need the work because reducing your rate will likely mean you won’t hit your financial targets.
3. Consulting Monthly Retainer
Think of this as tending to a beautiful garden. Your ongoing advice and support are like the nourishment that helps the garden flourish. A monthly retainer suits clients who require consistent guidance and want to have you available on a regular basis.
Consulting Example: You’re guiding a growing SaaS company. They need continual advice on marketing strategies, leadership skills, and staying ahead in their competitive market.
Pricing Model Example: The retainer pricing model for consultants is very widely used when you have a long-term commitment that does not have a fixed deliverable, like a project would.
Estimate the time you will allocate to your client each month. This can range from 4 hours per month all the way to 25-50% of your time. For small amounts of time, multiply your hourly rate by this number. A 4-hour-per-month retainer is basically an hour a week. I find that retainers under this number of hours don’t make much sense since it costs you time (hence money) to ramp up and prepare for such meetings.
If your client wants to hire you for 10 hours a week, or about 25% of your total time, and you are able to acquire at least 3 such clients, you can consider a slightly discounted rate because the hourly calculation above is based on 1,000 billable hours. Another way to look at it is that if you are able to secure clients at your full hourly rate, there is no need to offer any discounts.
Other Factors that Influence Your Consulting Rates
If you’re really good at what you do, don’t short change yourself by pricing yourself too low just to get business. There is a brand perception for higher priced services. Word can spread about your low consultant hourly rates. This can pose a challenge as you try to get higher-paying clients.
Look at it like this: there is a reason that Mercedes-Benz and other luxury car companies price their vehicles much higher. They might have a few extra features, but a major factor in people buying their cars vs. cheaper ones is brand value.
You can probably bill higher consulting rates if there is a strong brand perception related to working with you. You can make this happen by writing lots of educational content to put on your website, speaking at events, writing books.
Author: Raj Khera is an Executive Business Coach, a former 3x CEO, and publisher of MoreBusiness.com
